Note to Alcan: Eat or be eaten

Alcan and Alcoa should merge to create a North American giant because the opportunity will never come again.

The two spent months talking a merger, then negotiations broke off for some unknown reason. Last month, Alcoa Inc. made a hostile US$33-billion bid for Alcan Inc. The deadline is July 10.

But one of two other things should happen: The two must merge and re-engage in ways to create a North American powerhouse. Or, better yet, Alcan should join forces with others to make a counter bid for Alcoa.

If not -- and it looks like Alcoa's bid won't be accepted -- we will likely witness another demoralizing and damaging Inco and Falconbridge fiasco.

Like Alcan and Alcoa, Inco and Falconbridge were ideal merger partners. But this never happened because their managements stared at one another for decades, unable to do what made sense. Part of the problem was that their managements ran world-class businesses with branch-plant mentalities.

What didn't they understand about the consolidation sweeping the global economy in commodities? Did they not see this coming when the gold companies merged and absorbed one another?

Inco and Falconbridge dithered and were both picked off by two foreign-owned, aggressive global mining consolidators.

The cost to the country was huge: the loss of two head offices, the disappearance of a bias toward hiring Canadians or undertaking Canadian projects; the loss to Canadian suppliers and creditors and the cost to taxpayers because foreign buyers always load up on debt and write off interest against profits to avoid tax.

The branch-plant mentality doesn't understand that it's an eat-or-be-eaten world out there, which means that the only defense is offense.

There are two drivers for this: bottomless capital at relatively low interest rates and a perception elsewhere in the world (notably developing countries or start-ups) that a scarcity premium is appropriate for established multinational businesses.

"A takeover premium is more than a financial number," said Terry Ortsland, mining analyst and consultant in Montreal.

That's because it takes decades to build companies like these and there's a scarcity of them. Add to that the fact that technology allows anyone to run a company from anywhere.

"There is a scarcity of product volumes and product differentiation, too," Terry said.

On top of that, there's what I call an "economy-building" premium attached to companies producing raw materials needed by fast-growing economies that are going through their own industrial revolutions. They need steel, copper, nickel, aluminum, metallurgical coal and energy.

Aluminum is made from alumina (made from bauxite) and prices for this have been driven through the roof (US$150 a tonne to US$500) by China and by Russia and its former republics. They are net importers with few supplies of their own. They need alumina as feedstock for the gigantic aluminum smelters their governments have built. Aluminum, steel, nickel and other commodities are the cornerstone of any auto industry.

So the consolidation strategy should have been seen coming by the highly paid suits running Canada's mining outfits.

The first aluminum "casualty" was Novelis Inc., listed as Canada's 30th-largest company, which was just bought for US$6-billion by India's Hindalco Industries.

Alcan may be a big deal in Canada as our seventh-largest corporation but it's not big enough as long as it's only the third-biggest aluminum company in the world.

The best outcome would be if Alcan and some Canadian private-equity or pension partners (perhaps the Caisse de depot?) made a counter bid for Alcoa to either bring it to the table for a merger of equals and create an entity big enough to repel other marauders. But this is unlikely.

As things stand, we have another set of ditherers, both of which are probably about to be picked off by some of the same mining consolidators who gr